Unrelated

Diversification
GROUP 8
Tyco Section A

International Veeresh Goswami

(PGP/17/060)
Itishree Dash (PGP/17/083)
Manash Hazarika
(PGP/17/091)
Pooja Punjabi (PGP/17/102)
Ritika Sharma (PGP/17/289)

1
ntroduction

Diversified Manufacturer based in Exeter, New Hampshire

Founded by Arthur J. Rosenburg in 1960 as a R&D laboratory who pursued a vision of rapid growth
through acquisitions
By 1973, with over 20 acquisitions and increased sales to $40 million, the company was
transformed from R&D provider to manufacturer
1996: Sales of $5 billion and net income of $310 million
300 individual profit centres in over 60 countries
1997, Business Week described Tyco as stars you may never have heard of and listed it in top 50
companies
Most of its businesses had leading share of their respective markets
Volume purchasing, efficient production, greater market share helped Tyco become low cost
producer and price leader
It received a blow on Oct 6, 1995 when CII included it in its list of 20 worst performing S&P 500
companies, but it was challenged by its leaders and believed a conglomerate was difficult mode of
operation

Group 8 | Section A | Tyco International 2

erating Divisions
Each division was headed by a president who was responsible for developing group level strategy
and building sets of related businesses within their respective domain

DIVISION PRODUCTS MAJOR COMPANIES

Fire Protection Detection Systems, Sprinklers, extinguishers, Grinnell
hydrants, hazardous equipment and other related
products. Maintenance was included
Flow Control Variety of pipes, fittings, meters, valves and other Grinnell, Allied Tube and Conduit,
pipeline related products Mueller
Disposable Medical Gauze, incontinence, urological and anesthetic Kendall International
Products supplies, vascular therapy products and medical
electrodes
Simplex Technologies, Transoceanic fiber optic cable, underwater power
Inc. cable, flexible pipe and other undersea cable
products
Packaging Materials Packaging material for industrial and commercial use Armin Plastics, Ludlow Laminating
and Coating, Carlisle Plastics
Specialty Products Catch-all group; Environmental, printed boards, Earth Tech, Tyco Printed Circuit
fabrics and metal parts Board Group, Twitchell, Accurate
Group 8 | Section A | Tyco International Forming 3
dership over years
Joseph P. Gaziano,
1973-1982
Appointed as Group president, chairman and CEO in April 1973
Established a goal on making Tyco a $1 billion company by 1985
Strategy: aggressive acquisitions(hostile raids); even failed attempts left Tyco with handsome profits
By 1982, Tyco was transformed to $574 million conglomerate with substantial market share

John Fort, 1982-1993

Initially Simplex Technologies president in 1974, names as COO of the Group later
Due to high debt and chaotic management, he discarded the goal of $1 billion company and concentrated on operating
performance by cost-cutting measures like eliminating perks, corporate jets, apartments and reducing staff at corporate
headquarters to 35 people, selling non-productive assets
Reorganised the firm into three business segments: Fire/Flow, Packaging materials and Electronic and Electrical
components
Building a disciplined organisation: Restructuring compensation systems (high performance bonuses),
decentralisation of operations, powerful controllers organisation where all presidents had to account for every dollar
spent
Acquisition policies: to make firm a single source of manufacturing, contracting and supply for its customers
Increased Tycos worldwide presence with overseas acquisitions
Dennis Kozlowski,
Performance: ROE averaged at 18% and EPS increased an average of 25% per year, Total sales $1 billion in 1988 , $2
1992-1997
billion
Initiallyinpresident
1990 andof$3 billion 1991
packaging business, later joined fire/flow division, and became COO in 1989
Fire/Flow
Changed division
companysaffected
nameby to recession in 1990 due to cyclical construction industry
Tyco International
Set two goals for the company: doubling EPS to $5 per share in 5 years and reducing operating cyclicality
To build on other two segments (packaging and electrical) that had 15% earnings growth and make them stronger
Strategy of acquisitions in industries ripe for consolidation
Reducing cyclicality: increasing service offerings in core businesses and geographic expansion 4
Control and
Compensation
Corporate decided on allocating capital and managed firms compensation system
Total staff at the headquarters was only 50, 0.1% of 40000 Tyco employees
Formal support staff for senior executives was limited to a single shared secretarial assistant
All corporate executives were familiar with the operating businesses
Cost of capital was uniform across divisions and competitive with market rates and control of capital
was highly centralised
Budgeting Remuneration
Budgeting process Top-down and budgets Incentive system that provided high
renegotiated every year rewards for outstanding performance. Base
Targets were set and each business was salaries were relatively low
expected to strive to be leader in its industry 3 plateaus of operating performance
and outperform industry average Stock was an important part of
compensation plans
Acquisition process
Potential acquisitions identified by operating managers, and headquarters applied a structured
evaluation process
Criteria to decide: ROI in high teens, friendly deals and immediate accretive to earnings
Due diligence: how many people to lay off, which plants to be closed and synergies to be
exploited to reduce costs
No involvement of business units in price negotiations
Group 8 | Section A | Tyco International 5
uestion 1

Does Tyco have a corporate level

advantage? Does the firm do anything
unusually well?

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Group 8 | Section A | Tyco International
gle of Corporate Strategy The Bare Essentials
Competitive
Advantage Competitive Advantage: The competitive
advantage of Tyco was its acquisition
strategy. This was done to bridge the gap in
its products/businesses.
Coordination: The corporate headquarters
provides insurance, treasury functions,

Bu
s
rce

es
investor relations and stock issues.

sin
u

es
so

s
Re

Control: The corporate executives

managed the compensation system,
allocated budget and controlled the
businesses.
Corporate executives were intimately familiar
with the operating businesses and worked to
access potential acquisitions.
Corporate executives eliminated
Organizatio bureaucratic zeal.
Coordination Contro
n
l 7
Group 8 | Section A | Tyco International
Resource Continuum
Tycos resources are General in nature - financial
TYCO
controls across divisions, good incentive programs
for employees/division heads, strong manufacturing
General Nature of Specialized base, and operating managers who are highly
Resources motivated by incentives and who enjoy working
without a whole lot of group support

The general nature of resources facilitates their

Wide Scope of Narrow application across a wide range of businesses
businesses
Considering the general nature of the resources,
Tyco can effectively deploy them across divisions
Transferring Coordination Sharing through transferring them rather than sharing any
Mechanisms particular skillset

The corporate strategy exhibits strong control over

the financials; the operations are left in the hands of
Financial Control Systems Operating the units. The allocation of budget is done based on
their performance appraisal

The corporate office size is small in terms of the

Small Corporate office Large number of people employed over the years (50 out
size of 40,000 employees)
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Group 8 | Section A | Tyco International
e firm do anything unusually well?

Despite the general nature of the resources, Tyco restricts itself against acquiring a wide array of
businesses. It consciously confines itself to such businesses which support alignment of existing
organizational processes with the choice of businesses. This helps them to fill in institutional gaps
in the existing businesses and renders them as a full fledged provider of products/services they are
involved in and garner greater market power.
The division executives of the acquired divisions are held strictly accountable for a limited number
of financial measures (financial control rather operational).

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Group 8 | Section A | Tyco International
uestion 2

When over the life of a business does

Tyco add value?

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Group 8 | Section A | Tyco International
r the life of a business does Tyco add value?
Stages of Contribution of Tyco as conglomerate at each Value Corporate
business stage Added Strategy
Start-up / Feasibility Analysis, Resource expertise HIGH Through choice of
Acquisition - Acquiring businesses to fill void business
- Guidelines on bulk purchasing
- Excellent negotiations and acquisitions
Early growth Management team, Strategic advice LOW
- Yearly targets, unit specific short term goals
- Collective vision
Rapid growth Operational freedom, Financial control, Access to HIGH Through
capital market organizational
- Control system (leaders directors network) process
- Small corporate team, managers in-charge of divisions - Low cost,
- Compensation policies, performance based bonus - Financial
system economies
- Managers responsible for outputs, return on assets and - Ownership
EPS (earnings per share) structure
- Centralized yearly budgets decided for divisions, top
mgmt ensures cash flow
Maturity / Catalyst for Innovation, Turnaround specialist, MEDIUM
Reinvention Cash flow
-External consultants/ analysts
Group audit A
8 | Section company every year
| Tyco International 11
uestion 3

Should Tyco continue as a single conglomerate or six

different companies?

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Group 8 | Section A | Tyco International
ontinue as a single conglomerate or six different
Benefit for parent company Tyco in staying as
single entity:
Valuation: The company is valued as more valuable as
a whole than individual businesses by outside consultants Tyco's price per
benefits shareholders share
Exercising Control: Decentralization but not at the Price per share
under spinoff
cost of losing control
Market Capital: Last four years $1.2 billion to $20 Exhibit 3
billion (if all deals are finalized)
Benefit for the Division in Tyco staying a single entity:
Defined Goals: Coercion to perform well Demanding 15% increase in EPS each year
Supervision at low cost
Control with Autonomy: Corporate executives had a birds eye view of the businesses
division-level managers could concentrate on growing their respective businesses
Better due diligence during the Acquisition process Data gathering and projection by
the company and negotiations by the corporate headquarters

Points in support of Spin-off Counter View:

The tight knit control in terms of
Very few transactions or resource flows among
financial resources and working
Tycos divisions flexibility in terms of operations is an
Across six divisions, very little synergy as important reason for the conglomerate
compared to the size of the company to exist 13
Group 8 | Section A | Tyco International
uestion 4

Is Tycos strategy sustainable?

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Group 8 | Section A | Tyco International
cos Strategy Sustainable?
Tycos Internal
Structure
Tyco follows a Competitive form of structure
Characteristics:
Complete independence among the firms divisions which compete for corporate resources;
divisions do not share common corporate strengths. Because strengths are not shared,
integrating devices are not developed for use by the divisions included in the competitive
structure;

Foundation of the strategy:

Efficient internal capital market; emphasis on divisional competition rather than cooperation;
least centralized; lowest bureaucratic costs

Possible Evaluation Criteria:

Return on Invested Capital (conglomerate); Return on Equity (shareholders)

In this structure, organizational controls (primarily functional controls) are used to emphasize and
support internal competition among separate divisions and as the basis for allocating corporate capital
based on divisions performances

Focus Areas of the Corporate Headquarters:

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Performance Appraisal; Resource Allocation; Long range planning to ensure financial success
Group 8 | Section A | Tyco International
cos Strategy Sustainable?
Benefits of Internal
competition
Internal competition creates flexibility during budget allocation/future investment decisions. Tyco
enjoys the flexibility to allocate more resources to divisions which exhibits the most potential to fuel
the entire firms success at any particular period of time
Internal competition challenges the status quo and inertia across divisions. Division heads know that
the future resource allocations are a product of excellent current performance as well as superior
positioning in terms of future performance
Internal competition motivates divisional effort in that the challenge of competing against internal
peers can be as great as the challenge of competing against external rivals

Benefits of Internal
Capital
Althoughmarkets
a firm must disseminate information, that information also becomes simultaneously avail
able to the companys current and potential competitors. With insights gained by studying such
information, competitors may find it easier to attempt to duplicate a firms competitive advantage.
Thus, an ability to efficiently allocate capital through an internal market may help the firm protect its
competitive advantages
Capital can be allocated according to more specific criteria than is possible through external market
allocations
Thus, Tyco through its strong financial controls ensures that every manager has to account for 16 every
Group 8 | Section A | Tyco International
cos Strategy Sustainable?
Sustainability External
Environment
Diverse businesses globally. Control against recession and other cyclical factors
Tyco doesnt have any one particular large customer (low buyer power) or competitor (consolidation
by virtue of acquiring competitors in any particular market it is operating in).
Low cost advantages

Currently Tyco ventures into consolidated industries that are mature and low-tech, so it is able to
align newly acquired business units to the organisation. Tycos strategy is sustainable because of
consistency in internal structure and proper balance between centralisation and decentralisation.
However, it is largely dependent on the type of industries it ventures in future.

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Group 8 | Section A | Tyco International
THANK
YOU!
Group 8 | Section A | Tyco International 18